CEEMEA TRANSCRIPT: Interview with Polish DMO Head Karol Czarnecki

30 January 2024

By David Barwick – VIENNA (Econostream) – Following is the full transcript of the interview conducted by Econostream recently with Karol Czarnecki, Director of the Public Debt Department at the Polish Ministry of Finance.:

Q: In the context of the recent election outcome, how does foreign demand compare with previous episodes of capital inflows over the last eight years?

A: Demand from foreign investors has been driven by positive sentiment related to the outcome of the last parliamentary elections. We were able to issue euro-denominated bonds in November, and we followed with January’s big issuance of the 10- and 20- year long-dated bonds. We see clearly the positive response to the outcome of the election.

Q: The finance minister said last month that ‘a larger part of the debt than in previous years may go to foreign investors.’ Are indications that this will be the case?

A: Yes. In addition to the foreign demand we’re seeing at the moment, we are also seeing a kind of a switch in money markets. This could be favourable for domestic issuances as well, which is very desirable from our point of view. In any case, we will be making an effort to attract foreign investors interested in investing in our domestic debt; that is a goal we’ve set for ourselves, because so far, mainly due, I think, to market conditions, the share of foreign investors investing in our domestically-denominated debt has fluctuated. However, now that we have a relatively predictable trajectory with respect to the policies of major central banks as well as to market conditions in terms of the real sector in Poland and the global economy, a lot of uncertainty has evaporated. So, from our point of view, conditions are now particularly favourable for foreign investors to get into Polish debt, especially given that the discrepancy between the rates is going to be rather stable and the stability of our currency adds certainty to investment portfolios.

Q: What do you think the share of foreign demand might be going forward?

A: That's difficult to predict, but at the moment I would say we’re getting about 14% foreign investors in our domestic debt. That means, keeping in mind the experience of previous years, that there should be room even to double that, but not overnight and only under favourable conditions, with no negative external shocks. So, from our point of view, stable, steady growth to a level above 20% is absolutely possible.

Q: The revised 2024 budget implies a deficit higher than previously forecast. Is this an obstacle for you?

A: The difference between the budgetary requirements and the gross budgetary requirements was somewhat of a challenge. But having in mind that the budgetary draft for 2024 prepared by the previous government was known since at least the middle of 2023, there was rather small divergence between the original budgetary act and the amendment that has been put in force by the new government, and this divergence is not material from our point of view as well from the markets’ point of view. We have been preparing a new pattern of bond selling for over half a year, dedicated to smoothing the supply of bonds. Also, the level of pre-financing is very helpful, with 32% of our budget requirements already covered, which makes our job a bit easier.

Q:  What about any impact from the conflict between the governing coalition and President Duda? Have you noticed any impact at all on the demand for Polish government bonds?

A: Not at the moment. More generally, although I'm not a politician, my overview is that this is just an example of the usual dynamics of a democratic society and state. That is, the recent shift in political power is relatively dramatic, the objectives of the key politicians are different and their philosophies are opposed. So, we're observing some frictions now. From my point of view, this is normal, and these frictions will not materially influence developments in the near future, because what we are observing now seems more a kind of political argument that don’t impact our trajectory and the attractiveness of Polish government bonds.

Q: So you're not worried about the possibility that we'll get to some state of like legislative paralysis if President Duda refuses to sign the 2024 budget?

A: I don't think that the president is going to refuse to sign the Budgetary Act, also because in many respects it’s based on assumptions of the predecessor government. So, one could say that this Budgetary Act is a kind of continuity of the previous government's policies in many very important areas. From my point of view, there are no material reasons why this Budgetary Act could be rejected, not to mention the fact that under the Polish legal system, the president is obliged to sign the Act, because the budget is crucial for the operation of the state. There are a lot of Acts that may be stopped in the legislative process by objections of the president, but if the Budgetary Act is prepared according to the rules and by the relevant dates, it may not be rejected by the president.

Q: So you expect political tensions to subside and demand for Polish government bonds to stay relatively solid.

A: Most likely yes.

Q: Are you satisfied with the result of the dual tranche euro-denominated bond issuance on January 4?

A: Yes, definitely. I'm particularly satisfied in view of the fact that on the date of issuance, there was movement in the rates. So, the technical conditions were challenging. But in general, there was very strong demand as a whole for Polish debt. So, abstracting from those technical issues, which are not important in the long term, the execution of the process and the conditions we obtained were favourable.

Q: Do you expect to do further euro-based issues this year under the EMTN?

A: We’ll consider that. Things will be very dynamic when it comes to the inflow of new funds, which also gives us a kind of liquidity buffer. But at the moment, we are satisfied with what we did in January. Probably we will appear, but it's dependent on market conditions in the sense that it’s driven by favourable market conditions rather than by our needs.

Q: And would you expect to issue in another currency?

A: Yes. We have a main source of funding, which is the euro market. We also see that the US market is becoming more and more important. So, the pattern of our activities involves being on both markets, and of course we’ve also diversified into the Japanese market as well. So, as we predicted last year, our diversification will continue.

Q: So, yen and dollar.

A: Yes, probably.

Q: On another topic, Poland is on the front lines when it comes to Russian military aggression. If

the US were to suddenly stop supporting Ukraine, what do you think the impact would be on demand for Polish government bonds?

A: That’s a very difficult question. What we are doing now in financing such large amounts of government debt also includes financing for the military. There is a consensus in Poland that we need to be very well prepared for all potential outcomes of the Russian aggression towards the Ukraine. From our point of view, that means at the moment that we're in a very comfortable position, but even two years ago, looking at what's going on our eastern border, we knew that we should also be prepared for a negative outcome, that is, negative from our point of view as well as from Ukraine’s. The most important thing is the level of preparation we have. Still, a negative outcome could have an influence, but then not only for Polish government bonds. Such a shift in policy on the part of the US would have an influence on global markets. So, we will follow developments closely and will adapt as needed.

Q: If the war suddenly ended in a positive way, from our point of view and Ukraine’s point of view, and a lot of the Ukrainian refugees now in Poland headed home? How would you expect that to affect government debt issuance?

A: What we are observing now is a shrinking number of Ukrainians here in Poland as refugees. Some of them are returning to Ukraine, either permanently or temporarily. Also, some are trying to transfer to other EU countries. Those are two factors that are visible. The contribution of the refugees to consumption in Poland remains stable and I think that the prospects for the Polish economy for the next year will not be very dependent on the number of Ukrainians. However, they do support the labour market; indeed, their contribution to the labour market is stronger than their impact on consumption. Labour market tensions have essentially evaporated due to the inflow of refugees. But in general, the situation is stable and rather predictable, more stable than it was two years ago, for sure.

Q: The zloty-euro exchange rate is stubbornly refusing to climb above 4.36 zloty per euro. Are you still expecting the zloty to return to 4.4 per euro?

A: The zloty is relatively stable, and at the moment I would only predict that it will remain relatively stable and strong.